will apply to all UK and EPO patents, no matter when commercialised or granted

to be phased in over 5 years, from 2013/14 – full benefit not until 2017/18

a seriously complex round of computations will be involved, with analysis of income and expenses across the company and possibly by division required

Responses to the consultation are requested by 2 September 2012.

The consultation paper builds on the previous round of consultation, with more detail on the proposals following the responses to that round. There is still no draft legislation to consider, as the paper focussed on the high level principles involved.

Qualifying IP

The patent box proposals are to be extended to income from: data exclusivity (regulatory data protection), plant variety rights, and supplementary protection certificates (for pharma and agrochemical patents) as these are considered to be appropriately subject to external scrutiny before being granted.

Qualifying patents will be those granted by the UK Patent Office and the European Patent Office only – the UK is usually quite accommodating about foreign IP but the wider range of patents granted in (say) the US is clearly a step too far for the UK Revenue. The consultation indicates that the Government is open to the idea of including patents granted by other nationalauthorities where the local examination process, and scope of patentable ideas, is similar to that in the UK. However, it will not include non-UK/EPO patents that could have been protected by patent in the UK but have not been so protected – the consultation paper notes that HMRC is not in a position to judge whether the UK Patent Office would have granted a patent. This may lead to an increase in patent registrations in the UK; I doubt whether anyone has considered the additional resource issues that might arise for the Patent Office as a result.

Outright ownership of the patent will not be required: the patent box will be available to UK companies with an exclusive licence (as to field or territory) to a licence, where there is effective market exclusivity. It appears that the licensor (if a UK taxpayer) will have the advantage of the patent box for the royalty income, and the licensee could (presumably) have the advantage of the patent box on the 'embedded income' in profits from manufacturing.

This is fairly theoretical because it is also proposed that – to be able to claim the benefit of the patent box – the taxpayer must be actively involved in the ongoing decision making in respect of exploitation of the patent. In addition, the taxpayer must have performed "significant activity" to develop the patented invention or its application. It's not impossible, as a result, thatneither the licensor could claim the patent box (where it is not actively involved in the ongoing decision making once a licence has been granted) nor the licensee (where it has not performed significant development activity). Legal protection and management of a financial investment won't count as activity or involvement.

Qualifying income

Qualifying income will be that earned worldwide by a UK company on such patents – this is perhaps likely to be more important for embedded income relief under the patent box (that is, income from utilisation of the IP rather than income from licensing).

When considering embedded income (the profit on sale of product that relates to the patent underlying the product), the patent must genuinely contribute to the product producing the income (it's not enough to simply say it's protected by patent).

Compensation and damages for infringement of a patent will qualify as income from patents.

Income from products made using a patented processes may qualify where an arm's length royalty can be imputed for the use of the patent.

Income from the sale of patents will qualify for the patent box rate (although if the patent is held in a separate company, and the company's shares are sold rather than the patent, the substantial shareholdings exemption could mean a 0% tax rate on the gain instead ...)

The patent box rate won't apply to income between application and grant of the patent at the time it arises but, once that patent has been granted, the company can claim the benefit of the rate for that income (up to four years). Ratherthan having to re-open the previous returns, this will be done by way of reduction of tax in the year the patent is actually granted.

Calculating the profits

The patent profits (for tax purposes) are to be calculated on a three-step basis which I'm not even going to attempt to explain, beyond saying that it will involve analysing the income and expenses of the company, possibly by division, and separating out the qualifying income, reducing it for a fixed percentage of 'routine' profits and rinse and repeat as necessary.

Commencement date

The November consultation suggested that all patents first commercialised after 29 November 2010 would qualify; this consultation paper now considered that this sort of cut-off date might not work all that well – the date of initial commercialisation can be hard to define (no kidding!), and a single date would require transitional rules for up to 20 years until all older patents have expired.

So the suggestion is now that the patent box will apply to all UK/EPO patents, but phasing in the benefits over the first five years of the patent box – effectively, 60% of the benefit would apply in 2013/14, then 70% in 2014/15 etc until 100% is available in 2017/18. It will still only apply to profits arising after 1 April 2013.

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